Cement producers face ‘toxic cocktail’ of mafias, imports and carbon taxes

Local cement producers say they face a “toxic cocktail of factors”, including economic decline, the construction industry crisis, cheap imports and environment-related issues.

According to Cement & Concrete SA, the industry, which is still trying to recover from the effect of Covid-19 lockdowns, faces low levels of public infrastructure investment.

This means it is producing just 12-million tonnes of cement a year, against industry capacity of 20-million tonnes.

In addition, the lacklustre performance of the construction industry, which is at the mercy of mafias operating across the country, has had a direct effect on the cement and concrete sector, the organisation’s CEO, Bryan Perrie, told Business Day.

Business activity in construction, an indicator of cement and concrete demand, has suffered several years of decline.

According to GDP figures published by Stats SA, the construction industry last posted positive growth figures in 2016, when output grew 1.4%.

The economic effect of the Covid-19 pandemic weighed heavily on the sector in 2020, when it contracted 18.5%. Last year, output by the construction industry was down 2.2%, and the downturn continued in the first two quarters of 2022 with quarter-on-quarter declines of 0.8% and 2.4%.

JSE-listed PPC Cement, one of the largest suppliers of construction material in SA, published half-year financial results earlier in November showing a 2% decline in cement sales volumes in its SA- and Botswana-based operations.

At the time, the company said that without a significant rise in infrastructure spending and tangible action against imports, SA’s cement demand was expected to remain subdued.

Eric Diack, CEO of cement and construction materials business AfriSam, said during a recent Business Day Dialogue that the industry “was saved” in the period leading up to the 2010 Fifa World Cup in SA because of the number of big construction projects undertaken at the time, but the industry “needs to be saved again” as it is now under immense strain.

The construction industry is potentially “a massive employer”. It now employs about 1.1-million people, but five years ago, the number was 1.5-million.

Diack said the business is feeling the effect of the lack of construction activity in SA. “There is very little construction happening at the moment, and our business is at the sharp end.”

The SA Institution of Civil Engineering’s (SAICE) 2022 Infrastructure Report Card for SA, published earlier in November, provides stark evidence of the deficit in infrastructure investment. The overall grade for SA’s public infrastructure declined from C-minus in 2011 and D-plus in 2017 to D-minus in 2022, the lowest grade yet recorded by SAICE.

Such a rating implies that infrastructure is at risk of failure, that it is not coping with normal demand and that it is poorly maintained.

SAICE notes in the report that despite the government’s proposed economic recovery plan, investment in infrastructure continues to decline. “After peaking at 22% of GDP in 2008, capital investment dropped to 13.7% by 2020, of which two-thirds are attributed to the private sector. This is less than half the targeted 30% of GDP called for by the National Development Plan,” the report says.

To achieve its target, the Treasury estimates that between 2020 and 2030 investment in infrastructure must increase from 3.9% to 10% of GDP for the public sector and from 9.8% to 20% for the private sector.

To further complicate matters, the cement industry is under pressure to reduce its carbon emissions. Cement emissions account for about 5% of the global total.

The climate change challenge to the industry’s sustainability, Perrie explained, lies in the significant quantities of greenhouse gases emitted during cement manufacturing through the burning of coal to power smelters. Nevertheless, the local sector has committed to “decarbonise in accordance with the 1.5˚C global temperature increase pathway in the Paris Agreement”.

One of the ways in which it is trying to reduce its carbon emissions is not to produce pure cement. This means reducing the clinker content by making use of secondary materials such as slag and fly ash.

But, said Perrie, “when you are not selling much cement, it is difficult to fund the purchase of new equipment that can help you reduce emissions”.

Cement producers are hoping the introduction of a general import levy on cement could provide some relief. SA imports about 1-million tonnes of cement a year, mainly from Vietnam and Pakistan, which, Perrie said, they believe is largely being dumped.

“We know the governments of Vietnam and Pakistan subsidise their cement industries to export and we believe some of the cement coming into SA is undercutting local producers by about 40%.”

The industry managed to have antidumping tariffs put in place against Pakistan in 2015 for five years, after which it was renewed for another five years in June. Cement & Concrete SA is now applying for antidumping tariffs against Vietnam, and also for a general import tariff.

Another setback is in the form of government regulations that do not require localisation of cement and concrete, leaving this to individual departments and state-owned enterprises.

erasmusd@businesslive.co.za